The risks that a political impasse will force the government to renege on its obligations keep rising with no negotiations or progress. Worse, it appears both sides’ positions are hardening.
House Speaker McCarthy’s ability to pass a budget bill via the thinnest margins has strengthened Republican’s belief that they can win concessions from the Administration, concessions that are an anathema to Executive Branch.
Washington is on a collision course, given how far apart the two sides remain on how to limit future budget deficits. The Democrats favor increasing taxes on the wealthy and improving compliance. The Republican favor cutting domestic discretionary spending. The only area of agreement is that Social Security and Medicare are off limits.
In my view most should be afraid about this standoff, especially at this point in the financial and economic cycle.
Complacency is great that after much vitriol and animosity, an eleventh-hour compromise will arise.
If the debt limit ends up binding, it is largely believed the Treasury Department would prioritize obligations—putting interest and principal on government securities first to avoid a sovereign default and delaying other types of payment to government workers and contractors.
Even if prioritization averted an immediate default the damage would probably be vast. Markets would be shocked having expected the usual last-minute deal. Stock and bond prices may dramatically decline. Volatility in the Treasury markets may greatly increase as all may worry about how long the payment prioritization would protect them.
Today is the conclusion of the two-day FOMC meeting. It is largely expected the overnight rate will be increased for the 10th consecutive time sending yields to the highest level in 16 years. It is the post meeting statement that may be most pivotal.
What comments will the Committee make about future monetary policy? Will the remarks about the looming debt ceiling debate excoriate both sides of the political aisle?
FRB Chair Powell has stated many times that the deficit and spending at current levels are unsustainable. The Fed Chief also stated a default would be “catastrophic.”
It is often written life is stranger than fiction. Perhaps such an axiom is appropriate today.
Commenting on yesterday’s activity, equities were moderately lower following a selloff in two regional banks, renewing anxiety over financial stability. The Treasury curve steepened.
Last night the foreign markets were up. London was up 0.15%, Paris up 0.57% and Frankfurt up 0.68%. China was up 1.14%, Japan up 0.12% and Hang Seng down 1.18%.
Futures are flat ahead of the outcome of the Fed meeting. The 10-year is up 6/32 to yield 3.41%.
